Philippines - Telephone System Expansion Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 18143 IMPLEMENTATION COMPLETION REPORT PHILIPPINES TELEPHONE SYSTEM EXPANSION PROJECT LOAN 35230-PH June 30, 1998 Energy and Mining Sector Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso AVERAGE EXCHANGE RATES US$l = Peso (P) 1989 $1 = P 21.69 1990 $1 = P 24.18 1991 $1 =P 27.52 1992 $1 = P 26.26 1993 $1 = P 26.76 1994 $1 = P 26.47 1995 $1= P 25.69 1996 $1= P 26.21 1997 $1 =P 29.58 1998 $1 P 29.58 (from Jan I to Mar 31) FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS DBP - Development Bank of the Philippines DTC - Department of Transportation and Communication IBRD - International Bank for Reconstruction and Development ICR - Implementation Completion Report IFC - International Finance Corporation NTC - National Telecommunications Commission NTDC - National Telecommunications Development Committee PLDT - Philippines Long Distance Telephone Company PPF - Project Preparation Facility UBP - Union Bank of the Philippines Vice President Jean-Michel Severino, EAPVP Country Director Vinay Bhargava, EACPF Sector Manager Yoshihiko Sumi, EASEG Task Manager Veronique Bishop, EASEG Author John Cameron, Consultant  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF THE PHILIPPINES TELEPHONE SYSTEM EXPANSION PROJECT (Loan No. 35230 PH) Talble of Contents Page No. Preface ................................................. ii Evaluation Summary .................................................. iii Part 1: Project Implementation Assessment ........................................... 1 A. Project Setting and Statement/Evaluation of Objectives .............. ...........I B. Achievement of Objectives ..................................................2 C. Major Factors Affecting the Project ................................................... 6 D. Project Sustainability .................................................7 E. Bank Performance ...................................................7 F. Borrower Performance ..................................................9 G. Assessment of Outcome ................................................... 9 H. Future Operation ................................................. 10 I. Key Lessons Learned ................................................. 10 Part 2: Statistical Tables ................................................... 12 Table I Summary of Assessmet .13 Table 2 Related Bank Loans/Cnrdits .15 Table 3 Project Timetable .16 Table 4 Loan Disbursements: Estimated and Actual .17 Table 5 Key Indicators for Project Implementation .18 Table 6 Key Indicators for Project Operation .19 Table 7 Studies Included in Project .20 Table 8A Project Costs . .................................................. 21 Table 8B Project Financing .................... .............................. 21 Table 9 Economic Costs and Benefits .................................................. 22 Table 10 Status of Legal Covenants .................................................. 24 Table 11 Compliance with Operational Manual Statements ........... ....... 27 Table 12 Bank Resources: Staff 'Inputs ................................................. 28 Table 13 Bank Resources: Missions .................................................. 29 ANNEX A: MISSION'S AIDE MEMOIRE .................................................. 31 ANNEX B: BENEFICIARY'S CONTRIBUTION TO THE ICR .................. 39 ANNEX C: BORROWER'S CONTRIBlUTION TO THE ICR ...................... 46 MAP IBRD NO. 22934 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  i. IMPLEMENTATICON COMPLETION REPORT REPUBLIC OF THE PHILIPPINES TELEPHONE SYSTEM EXPANSION PROJECT (Loan No. 35230 PH) Preface This is the Implementation Completion Report (ICR) for the Telephone System Expansion Project in the Philippines, for which Loan 35230-PH in the amount of $134 million equivalent was approved in October, 1992 and made effective on November 23, 1993. The loan closing date is December 31, 1998 but the balance of the loan was canceled upon the borrower's request effective May 1, 1997. Final loan disbursement took place in March 18, 1998 and this brought the total loan disbursements to $37 million. The Project Task Manager is Veronique Bishop (EASEG) and the ICR was prepared by John Cameron (Consultant). It was cleared by Mr. Yoshihiko Sumi, Manager, EASEG. Leo Rodaje, (EACPF) participated in the ICR niission and contributed to the mission's work. Peter Wright (IENTI) and Peter Smith (IENTI) reviewed the ICR. The Philippines Long Distance Telephone Company (the beneficiary) and the Development Bank of the Philippines (the borrower) provided comments which are included in the ICR. Preparation of this ICR began during the Bank's final supervision/completion mission in December 1997 and concluded during a brief follow up mission in March 1998. The borrower and beneficiary contributed to the preparation of the ICR by preparing relevant data and information and preparing their own evaluation of the project's execution and initial preparation. These are included in the Appendix.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF THE PHILIPPINES TELEPHONE SYST'EM EXPANSION PROJECT (Loan, No. 35230 PH) Evaluation Summary Background i. In the 1980s the telecommunications sector was recognized as being one of the leasit developed infrastructure sectors in the Philippines. Service coverage was sparse: in 1986 the nationwide telephone density was 1.0 line per 100 people. This was one of the lowest among the ASEAN countries. A single private operator, the Philippines Long Distance Telephone Company (PLDT), provided 92% of the lines and all long-distance and international service. About 50 independent local telephone companies operated the remaining lines. ii. The Government recognized that inadequate communications constrained economic development. Its policy was that: (a) the private sector would be the engine of sector growth; (b) the sector would be financially self-supporting; (c) all public telecommunications networks should be entitled to interconnect with each other; and (d) growth in the sector should be maximized, subject to resource constraints, particularly the availability of foreign exchange. Economic and financial conditions in the Philippines constrained telephone operators fromn raising investment capital from commercial sources. As a consequence in 1990 the Government decided to make borrowing from official sources available to private operators to pursue: investments in public call offices in unserved localities. iii. The major focus of the Bank Assistance Strategy for the Philippines at the time the project was prepared was the provision of infrastructure. It also recognized the need to strengthen public sector institutions. However, it did not specify telecommunications as a priority sector for assistance. Project Development Objectives iv. The main objectives of the Telephone System Expansion Project were to: (a) increase telephone penetration and leased line facilities in PLDT's service area, with an emphasis on provincial development; and (b) improve PLDT's quality of service and efficiency. In addition to the stated project objectives, the rationale for Bank involvement in the project included the following institutional objectives: (a) to irnprove institutional cohesion; (b) to assist with the implementation of NTDP policies; and (c) to develop a growth-oriented institutional framework. v. The project objectives were clear and should have been readily achievable given adequate planning. In view of the fact that the country's inadequate communications constrained economic development, the project should have contributed to the development of the country.  iv Project Components vi. The project was designed to achieve its objectives through investment in telecommunications hardware and through assistance to strengthen PLDT's management capabilities. The main project components were: a. Expansion and rehabilitation of telephone services in provincial areas through the provision of 133,000 lines of exchange equipment; b. Provision of about 97 public calling offices (PCOs) in currently unserved municipalities in 10 provinces; c. Interconnection of six isolated exchanges, managed by independent operators, with PLDT's toll network, thereby, providing them with access to national and international services; d. Provision of outside plant to connect about 41,000 new customers thereby utilizing more completely the local exchange capacity becoming available in the Metro Manila area; e. Provision of special circuits, in Metro Manila area and 20 Provincial cities, to be used as leased voice and data lines; f. Provision of a transmission maintenance system to improve PLDT's inter-exchange circuit operations and maintenance performance; g. Provision of training equipment for PLDT; and h. Consultants to strengthen PLDT's program management capabilities. vii. The project components as described are appropriate to meet the stated objectives of increased penetration and improved quality of service, but inadequate to meet the additional institutional goals stated in the project rationale. In particular, the resources available for training and consultant assistance (components g and h) were insufficient to build the institutional framework for the sector. Although the project components complement PLDT's wider investment program, certain components were judged by the beneficiary to be uneconomic once the project was being implemented. Implementation Experience and Results viii. The Telephone System Expansion Project became effective in November 1993, some four years after initial identification (October 1989). The project was originally planned to be implemented over four years (1992 to 1995) with a planned investment (including interest during construction) of $288 million. The Bank's loan for the project was $134.0 million. The implementing agency and beneficiary of the loan was PLDT and the borrower was the Development Bank of the Philippines (DBP). The closing date for the loan is December 31, 1998. (para. 13) ix. In September 1996 PLDT advised the Bank that it intended to cancel the undrawn balance of the loan amounting to $97 million. The loan was canceled effective May 1, 1997. Although the official closing date remained December 31, 1998, only $37 million had been disbursed. At that time the beneficiary had signed contracts for project works and equipment to the value $62.4 million (about 22% of total loan commitments) covering switching, transmission, and ,data equipment. (para. 17)  v x. Since loan cancellation, PLDT has proceeded with the implementation of the project and completed a number of the components. Implementation status as reported by PLDT as at December 1997 is as follows: a. Provincial telephone expansion completed b. Public call offices completed using alternative technology c. Interconnect non PLDT exchanges completed using alternative technology d. Manila outside plant & services implementation proceeding e. Leased line facilities implementation proceeding f. Transmission maintenance systrem little progress g. Training facilities completed h. Consultancy service partially completed Achievement of Objectives xi. The project partially achieved its physical objectives but achieved little of its institutional development and private sector development objectives. The major reasons for not fully reaching the objectives are that the loan was canceled early, there were project implementation delays, and insufficient project resources were applied to institutional development. (para. 21-25) Bank and Beneficiary Performance xii The Bank's performance under the project was deficient in that: (a) ownership by the government and beneficiary was weak; project preparation time was long and provision was not made for engineering work for investment components to be completed by project effectiveness; (b) project appraisal was inadequate; and (c) during project implementation the delay in engaging consultants, which had been identified as a project risk, was not adequately addressed. (para. 37- 47) xiii. The beneficiary's performance was satisfactory. PLDT met the Bank's documentation requirements and it completed the extensive paperwork needed to obtain regulatory and administrative approvals from the Government. PLDT largely met its financial and other legall covenants, with the exception of a dated covenant to appoint consultants by June 30, 1993, which adversely affected the project. (para. 48-50) Assessment of Outcome xiv The outcome of the project is considered unsatisfactory. At the time the balance of the loan was canceled, project objectives had not been met. Only the provincial telephone expansion and leased line facilities (components a and. b) had been partially completed, while progress with the other components was negligible. Only $37 million or 31% of planned disbursements had been made. Of this, $19 million had been spent on telephone exchanges, $9.6 million on transmission equipment, $7.7 million on outside plant, $0.6 million on other equipment, and $0.1 million consultant services (see Table 8A), At the end of 1997 implementation was proceeding with most other components.  vi Future Operation and Project Sustainability xv. Those project components which were implemented during the project have been integrated into PLDT's overall network and will be serviced by it. Because these investments are profitable and the company is accountable to its Filipino and international shareholders, it is likely that these components will-be sustainable. (para. 56) Key Lessons Learned xvi. On the basis of the evaluation the following are the key lessons: a. As shown elsewhere, lack of ownership of a project by Government and beneficiaries can lead to delays and difficulties in its preparation and implementation, preventing full achievement of its objectives. When market conditions changed, enabling PLDT to borrow from IF or other sources, the Bank should have reevaluated with the Government and PLDT whether an IBRD loan was still appropriate. b. The Bank essentially had decided to finance this project as a means of encouraging a quasi-monopoly to invest. Such an approach cannot work unless that quasi- monopoly is fully commnitted to the objectives of the project and the specific investments. c. Convoluted on-lending arrangements should not be attempted unless (i) the government and the borrower are highly committed to the project; (ii) there are no simpler alternatives; and (iii) the Bank is prepared to accept the risk of substantial delay or even failure occurring after Board approval. d. Borrower's willingness to implement technical assistance that the Bank deems to be necessary is a prima facie indicator of ownership. A lack of such willingness should be deemed a cause to drop a project, even after it has been approved by the Board. e. Project preparation documentation and reporting systems should contain sufficient material for effective project monitoring and supervision. f. Bank lending to private companies should presume that (i) the company has no other alternative; (ii) the company is fully committed to the project's objectives and investments; and (iii) the investment program being financed provides very substantial economic and social benefits.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF THE PHILIPPINES TELEPHONE SYSTEM EXPANSION PROJECT (Loan 'No. 35230 PH) PART I. PROJECT IMP]LEMENTATION ASSESSMENT A. Project Setting and Statement/Evaluation of Objectives Project Setting 1. Telecommunications sector. In the 1 980s the Philippines telecommunications sector was recognized as being one of the least developed infrastructure sectors in the Philippines. Service coverage was sparse and most telephone installations were concentrated in Metro Manila and, to a lesser degree, other principal cities. Some cities, small towns and rural areas had little or no access to telephone services. Where service was available its quality was patchy and waiting times for connections were lengthy (three to five years in Manila). In 1986, the nationwide telephone density was 1.0 line per 100 people, among the lowest in the ASEAN countries. Metro Manila had coverage of 9.6 telephones per 100 people; elsewhere in the country the density was 0.3 per 100 people. 2. Government's development policy. At the time the project was being prepared, the Government recognized that inadequate communications constrained economic development. Government policy was that: (a) the private sector would be the engine of sector growth; (b) the sector would be financially self-supporting; (c) all public telecommunications networks should be entitled to interconnect with each other; and (d) growth in the sector should be to maximized subject to resource constraints, particularly the availability of foreign exchange. Economic and financial conditions in the Philippines, however, constrained telephone operators from raising investment capital from commercial sources. As a consequence in 1990 the Government decided to make funds from official sources available to private operators to pursue investments in public call offices in unserved localities. 3. Bank's Assistance Strategy. The major focus of the Bank's country assistance strategy (CAS) for the Philippines at the time of project identification was the provision of infrastructure. It also recognized the need to strengthen public-sector institutions to increase their capacity to absorb foreign assistance and deliver required services. Although the CAS did not specify telecommunications as a priority sector for assistance, Bank management was interested in pursuing expanded investment in the sector in view of its underdeveloped state. 4. Previous Bank Experience in the 5'ector. Most of the World Bank Group's previous experience in the Philippines telecom sector was through the International Finance Corporation (IEFC), which had made five investments with PLDT since 1969 totaling $128.5 million and included equity investments. IFC also acted as financial adviser to PLDT, leading the syndication of $155 mrillion in loans for PLDT developmnent projects. In IFC's experience, PLDT generally met its implementation targets apart from delays in completing the assembly of project financing plans, regulatory clearances, and equipment deliveries. At the time of project preparation, however, IFC was unable to finance an additional loan to PLDT due to IFC's capital constraints.  2 5. The International Bank for Reconstruction and Development (IBRD) made its first loan to the Philippines telecommunications sector in 1985. Under the Technical Assistance Project (Loan 2495- PH), IBRD lent $4 million to strengthen the National Telecommunications Cofmmission (NTC) and update the National Telephone Program. This project met most objectives despite a number of implementation problems. As a result of the Bank's continued dialogue with the Government, the National Telecommunications Development Committee (NTDC) was established. 6. The Bank has also managed a Japanese Government grant of Yen 278 million for technical assistance to the telecommunications sector, which was irnplemented in parallel with the Telephone System Expansion Project. Its purpose was to strengthen sector management and regulation. The direct beneficiaries of the grant were the Department of Transportation and Communication (DTC) and the NTC. 7. Background of PLDT. PLDT was and remains one of the largest companies in the Philippines. At the end of 1991, its net worth exceeded P18 billion ($0.64 billion) and its annual revenues were about P16.6 billion ($0.6 billion). PLDT provided 92% of telephone connections in the Philippines, with about 50 other investor-and local-government-owned operators providing the remaining 8%. The secondary carriers were small, financially weak, and thinly capitalized. 8. PLDT's stock is traded on the Philippine Stock Exchange and the New York Stock Exchange. At the time the project was being prepared, about 39% of common stock was held by interests that have owned large blocks of shares for many years; 30% was owned beneficially by US-based stock brokerage firms on behalf of investors; 17% was owned by foreign investors; and 14% was held by investors in the Philippines. Proiect Objectives 9. The objectives of the project were: (a) to increase telephone penetration and leased line facilities in PLDT's service area with an emphasis on provincial development; and (b) to improve PLDT's quality of service and efficiency. In addition to these stated project objectives, the rationale for Bank involvement at appraisal was: (a) to improve institutional cohesion; (b) to assist with the implementation of NTDP policies; and (c) to develop a growth-oriented institutional framework. 10. These objectives were clear and should have been readily achievable given adequate planning. They were not, however, completely in line with the Bank's CAS. Nevertheless, in view of the fact that the country's inadequate communications constrained economic development, the project should have contributed to the country's development. B. Achievement of Objectives Project Components 11. The main project components were: a. Expansion and rehabilitation of telephone services in provincial areas through the provision of 133,000 lines of exchange equipment;  3 b. Provision of about 97 public calling offices (PCOs) in then unserved municipalities in 10 provinces; c. Interconnection of six isolated exchanges, managed by independent operators, with PLDT's toll network thereby providing them with access to national and international services; d. Provision of outside plant to connect about 41,000 new customers thereby utilizing more completely the local exchange capacity becoming available in the Metro Manila area; e. Provision of special circuits, in Metro Manila area and 20 Provincial cities, to be used as leased voice and data lines; f. Provision of a transmission maintenance system to improve PLDT's inter-exchange circuit operations and maintenance performance; g. Provision of training equipment iFor PLDT; and h. Consultants to strengthen PLDT's program management capabilities. 12. The project components and resources were appropriate to meet the stated objectives but inadequate to meet the additional institutional goals stated in the project rationale. In particular, the resources available for training and consultant assistance (components g and h) were insufficient to build the institutional framework for the sector. Although the project objectives complement PLDT' s wider investment program, during project implementation certain components were judged by the beneficiary to be not technically feasible and uneconomic as designed. Project Implementation 13. The World Bank's Board of Directors approved a $134 million loan for the Telephone System Expansion Project in October 1992. The loan was extended to the Development Bank of the Philippines (DBP) with a guarantee from the Government of the Philippines. The project was expected to be implemented over four years with a total investment of $288 million, and the planned closing date was December 31, 1998. 14. The project was not declared effective until November 1993, largely because of the complexity of on-lending arrangements, which were developed after Board approval. These delays should have been anticipated, because even though the framework for private financing can be agreed in advance, such deals are seldom closed until the very last. Thus, the Bank must consider whether it wishes to become involved in arrangements where closing may lag Board approval by many months, and where the terms and conditions of such arrangements might change materially. 15. On-lending arrangements were highly convoluted. IBRD could not lend directly to PLDT, as the Government (under the Foreign Borrowing Act) was prohibited from providing guarantees on loans to privately-owned companies. IBRD could lend to Government-owned banks such as DBP, but DBP's ability to on-lend to PLDT was constrained by single-borrower limits. An on-lending structure was devisecd which surmounted these constraints: IBRD would lend to DBP, which would on-lend the funds to a syndicate of banks which, for a fee, would then on-lend to PLDT. It was the only on-lending arrangement that could satisfy the existing consultants, even though it added substantially to PLDT's cost of borrowing. 16. Once the on-lending arrangements were agreed upon, DBP encountered difficulties engaging a syndicate of banks. Each potential syndicate bank also had a single-borrower limit  4 and were reluctant to tap out these limits, particularly for a long-term loan, at a fee that was very much lower than what they could earn on a peso loan to PLDT. Once the syndicate was finally arranged, one of the banks found itself unable to participate without breaching other covenants, so a substitute bank was found and the legal documents were amended accordingly. This process caused considerable delay in the organization of the overall project financing package and thus to the commencement of the project. 17. In September 1996 the DBP advised the Bank that PLDT intended to cancel the undrawn balance of the loan amounting to $97 million because the rapid growth in the economy of the Philippines and credit availability enabled PLDT to access more favorable credit from commercial sources. The loan was canceled effective May 1, 1997. 18. At that time, only 4 components had been completed: provincial telephone expansion, public call offices, interconnection of exchanges, and training facilities (components a, b, c and g). Progress with the other components was negligible. The Bank had disbursed $37 million (31% of loan commitment), of which $19 million had been spent on telephone exchanges, $9.6 million on transmission equipment, $7.7 million on outside plant, $0.6 million on other equipment, and $0.1 million on consultancy services (see Table 8A). Implementation status as reported by PLDT as of December 1997 may be summarized as follows: a. Provincial telephone expansion completed b. Public call offices completed using alternative technology c. Interconnect non-PLDT exchanges completed using alternative technology d. Manila outside plant & services implementation proceeding e. Leased line facilities implementation proceeding f. Transmission maintenance system little progress g. Training facilities completed h. Consultancy service partially completed 19. As of the end of 1997, implementation was proceeding on components d and e. The beneficiary expects to eventually spend a total of $183 million on the project compared with an original estimate of $270 million (before interest during construction; see Table 8A). It is further noted that the beneficiary estimates that about $100 million has been spent to date or 37% of the original project estimate or 55% of the revised estimate. An assessment of the key project indicators for project implementation and the status of implementation of each of the key project components as supplied by the beneficiary as of December 1997 is shown in Table 5. 20. Levels of expenditure. Total project base cost excluding interest during construction was estimated at appraisal at $236.5 million, of which $200.5 million (84.8%) was designated equipment and services, $34 million (14.4%) civil works, and $2 mnillion (0.8%) consultancy services. Reasons Objectives Not Fully Achieved 21. Implementation delays. Provision was not made during project appraisal to ensure that on-lending arrangements and bid documents would be ready at effectiveness. PLDT assessed that this lag resulted from both complexities in preparing specific documentation for the Bank' ' PLDT's preparation of project proposals, plans and financial requirements, and subsequent approval within PLDT senior management committees often required more than one year. PLDT indicated that  5 and the extensive paperwork necessary to obtain regulatory and administrative approvals from government. 22. Delays in appointment of consultants also hindered implementation. PLDT agreed to employ management consultants by June 30, 1993 to review project management structure, work practices, training, and support systems and recommend appropriate improvements; and assist with project management where necessary2. The consultants did not start work until August 1995, 26 months later than agreed and 21 months after project effectiveness. Had the consultants been appointed at the commencement of the project, procurement problems may have been solved earlier and project implementation may have been further advanced. Project supervision documentation3 did not flag legal covenants as being unsatisfactory. 23. Delayed project readiness was largely responsible for slow loan disbursement (see Table 4). The first disbursements were not made until 1995. By the end of fiscal year 1995 only about 30% of planned disbursements had been made, and by the end of 1996 the lag had increased to 36% (see Table 4). Late project startup, availability of other sources of funds, stringent Bank and Government procedures, poor communications, and dependency on DBP all combined to further slow disbursements. 24. Institutional development. Project design contained little structured institutional development or technical assistance compared with the size of the project; $2 million for institutional strengthening compared to a total investment program of $270 million (excluding interest). This may have had some impact if it had been timely but delays in the appointment of consultants to the inexperienced implementing agency and Government procedural requirements resulted in significant project delays. 25. Even though the project focused largely on telecommunications hardware and works, the Bank saw the project as a vehicle to continue to lead PLDT to take a balanced approach toward network and industry development. The Bank incorrectly believed that its dialogue with the Government and PLDT placed it in a unique position to use its involvement to address major industry issues. In view of the fact that the remaining balance of the loan was canceled so early in the implementation phase, it is assessed that the Bank did not have any significant input or impact on the sector. Economic Evaluation 26. Project preparation documents projected the financial rate of return from the project to be 15% and the economic rate of return, 21%. However, PLDT's overall investment program for 1991-96 contained three other components (thie X-5, X5C, and X-6 projects) apart from the Bank funded project. These other investment programs also involved the expansion of existing networks and customer facilities. In the financial and economic analysis prepared at appraisal, the projected returns from the Bank project were disaggregated from the overall benefits from the total investment program to arrive at the assessed return. preparation of Bidding Documents and Evaluation Reports to meet Bank standards was laborious and time consuming. 2 Section II of the Schedule to the Project Agreement between the Bank and PLDT 3Form 590s  6 27. Because the project was not completed at the time the balance of the loan was canceled and because of a lack of data, a detailed review of the economic return from the total project cannot be undertaken. However, to provide some indication of the financial and economic return from the project, an assessment of Component A (Expansion and rehabilitation of the telephone services in provincial areas) was undertaken4 (Table 9). It shows the financial internal rate of return and economic internal rate of return to be 33% and 47% respectively. This is significantly higher than the overall project return assessed as appraisal. 28. Table 6 provides key financial and physical operational indicators for PLDT over the period 1992 to 1997. Target data is taken from project preparation documents and actual data was provided by PLDT. The data for 1997 shows that the actual number of working lines is over 10% higher than the target for 1997. Total revenue in 1997 was 15% below that expected in project preparation documents; however, costs were also below projected levels, due largely to productivity improvements. Notably, the number of staff per 1000 working lines was about 55% lower than projected at appraisal. C. Major Factors Affecting the Project Factors Not Generally Subject to Government Control 29. Changed economic conditions. Changed economic conditions were a major factor affecting the outcome of the project. In its letter to the DBP in which it canceled the remaining balance of the loan, PLDT stated that the rapid growth in the economy of the Philippines and improved access to credit from commercial sources under more favorable terms and conditions were the reasons for canceling the undrawn balance of the loan. It is apparent that this major improvement in the economy had a significant impact on the availability of credit and that it enabled PLDT to access more favorable credit from other lenders. As a result PLDT rescheduled, redesigned, and canceled certain project components according to newly assessed priorities, conditions and technology. Although this restructuring may have improved the company's efficiency, it reduced the achievement of social goals including the connection of remote areas. Factors Subject to Government Control 30. Delay in completing on-Lending arrangements. Complications in finalizing on-lending arrangements to PLDT were a major source of delays in project effectiveness as discussed in para. 18 above. 31. Documentation requirements. Documentation requirements were significant during project preparation. PLDT experienced major difficulties complying with Government documentation and clearance requirements. These difficulties resulted in delays in project implementation. Factors Generally Subject to Beneficiarv Control 4Because of a lack of disaggregated data, the analysis assumes that average revenue and operating expenses from the new provincial lines is the same as the average for all PLDT lines.  7 32. Inexperienced beneficiary. According to PLDT, its lack of experience with Bank policies and procedures resulted in slow preparation and lack of ownership. 33. Procurement delays. Up to December 1995 implementation progress ratings5 were all satisfactory or highly satisfactory. In December 1995 procurement was downgraded to unsatisfactory but the overall implementation progress retained a satisfactory rating. The reason provided for the unsatisfactory procurement rating was that procurement was about eighteen (18) months behind schedule. PLDT was also making slower than expected progress in defining and preparing new feasibility reports and bid documents for remaining items. These difficulties are assessed to be largely the result of delays in engaging consultants to assist with procurement and project management and procedures within PLDT and Government. 34. Consultancy services delays. As noted above, delays in the appointment of consultants caused significant delays in procurement, which resulted in delays in project implementation. 35. Loan cancellation. The early cancellation of the loan also contributed to lack of achievement of project objectives. With little contact with the Bank and few regulatory requirements, PLDT was free to pursue its own financing and investment priorities. D. Project Sustainability 36. The infrastructure developed under the project generates substantial profits. Likewise, the hardware installed under the project is playing an integral role in the company's and the country's growth. Moreover, PLDT is subject to shareholder scrutiny both in the Philippines and abroad. PLDT therefore has both incentives and resources to sustain the physical investments made under the project. Indeed, PLDT's track record indicates that newly installed capacity is being maintained. The regional economic crisis is likely to depress PLDT's revenues and earnings for 1998 and possibly cause it to curtail its expansion plans. Nonetheless, the company's relatively low leverage and high debt service coverage will shield it from a downturn. E. Bank Performance 37. The Bank's performance is considered deficient in project identification, preparation, appraisal, and supervision. 38. The Telecommunications sector - a more balanced approach. Apart from the Bank managed Japanese grant which concluded in December 1994 and which benefited institutions other than to PLDT, the project included little institutional support which would have enabled PLDT to take a more balanced approach to the development of the sector. The project instead focused on investment in hardware. Of the total loan of $134 million, only $2 million was for consulting services. These services were largely focused in the area of project management rather than long term institutional development of the sector. Project components could have been better linked to institutional objectives. 39. Cornerstone Financier. The Bank considered that it would assume the role of a cornerstone financier for PLDT, which would enhance PLDT's financial credibility and its efforts to obtain additional investment needs from commercial sources. PLDT's financial strength and past borrowing history indicates that it did not need the Bank to fulfill this function. 5 As recorded in the Form 590s  8 40. At the time of project preparation, PLDT was unable to tap commercial sources of funds, nor was it able to borrow from IFC, as noted above. By October 1992 however, when the project was presented to the Bank's Board of Directors, both of these constraints had been lifted. Indeed, the day before Board presentation PLDT floated a $200 m stock issue on the American Stock Exchange. IFC had also received a capital increase in the summer of 1992, which would have enabled it to add to lend directly to PLDT without the convoluted arrangements required for the IBRD loan. Despite these significant changes, the IBRD loan was approved as planned. 41. Largely due to the availability of other sources of financing, the Government and PLDT became reluctant to complete the project with IBRD financing.. 42. Institutional development. The outcome of this project indicates that there is a need for the Bank to review how it can better achieve sector development by funding private development. It was believed that PLDT would be able to become more responsive to consumers by emphasizing cost optimization and quality of service. However, there was insufficient emphasis on sector policies in this project to achieve this, despite a substantial Japanese grant managed by the Bank. 43. PLDT and its competitors. Smaller telephone providers who operate in remote locations and less profitable areas might have been considered for inclusion in the project. These providers constitute about 50 other investor and local government owned operators providing 8% of services. They were generally small, financially weak and thinly capitalized. The incentives for competition, investment and efficiency could have been strengthened if these carriers had been included in this project. The reasons for their exclusion is unclear, particularly in view of the apparent need to expand communications in the lesser-developed areas of the country and also in view of PLDT's policy of not actively seeking to extend its services beyond narrowly defined, highly profitable areas. Project Appraisal 44. Procurement scheduling. Procurement delays were a major problem for the project. At appraisal, provision should have been made to ensure that bid documents for at least the first year's investment and procurement activities would be ready at effectiveness to prevent disbursement delays. This could have been supported through a Project Preparation Facility. 45. Monitoring indicators. The project documentation lacked key implementation milestones, a comprehensive implementation schedule, and detailed cost tables showing planned expenditure by project component by years. The lack of this material precluded an objective assessment of the progress of actual vs. planned project implementation. Project Supervision 46. Consultancy delays. The delay in engaging consultants should have been addressed during project supervision. The Bank assessed project management capacity as the only potential risk to the project. This was on the basis of the project extending PLDT's project management ability beyond its current capacity. The problem was to be overcome by the project providing PLDT with project management consultants. The project failed to mitigate this risk by failing to ensure that skilled consultants were appointed before project implementation started.  9 As noted above, the appointment of management consultants was a dated covenant in the Project Agreement. The Bank did not strongly pursue compliance with this provision. 47. Bank supervision.. While there was continuity of Bank staff during supervision it is evident that supervision lacked substance. The record of supervision for this project6 is an unreliable guide for assessing the quality of supervision. For instance, there are inconsistencies in the number of field staff weeks actually spent on supervision. Given the record, it is not evident why these supervision missions assessed project implementation progress as satisfactory. F. Borrower Performance Project Preparation 48. PLDT's performance during project identification, preparation and appraisal are considered satisfactory. As a first-time borrower from IBRD, PLDT experienced difficulties in preparing documentation required by the Bank, which caused some delays. PLDT was also overwhelmed by the extensive paperwork required to obtain regulatory and administrative approvals from the Government. Project Implementation 49. PLDT's performance during the implementation phase can also be rated as satisfactory even though it experienced difficulties during the initial phases of bid preparation and evaluation. PLDT eventually realized the need for longer lead-time to meet the Bank's requirements. 50. Covenant Compliance. DBP and PLDT were largely in compliance with financial and other legal covenants. However, as noted above, PLDT did not comply with the dated covenant to appoint consultants by June 30, 1993. G. Assessment of Outcome Overall Assessment 51. The outcome of the project is assessed as being unsatisfactory. At the time the Bank was advised that the balance of the loan was to be canceled, project objectives had not been met. Hardware Procurement and Installation 52. Procurement and installation of hardware was in progress for the provincial telephone expansion component and the leased line facilities component but no appreciable progress had been made with other components at the time the loan was canceled. Table 4 shows that total Bank disbursements were $37 million or 28% of the estimated Bank loan for the project. 53. Since the balance of the loan was canceled PLDT has proceeded with the implementation of the project. Table 5 details the status of its implementation. This shows that a number of the components have been completed. In the instance of the provincial telephone expansion component 6% more lines and 53% more exchanges than were originally planned have been 6Form 590s, Aide Memoires  10 installed. Implementation of other components is proceeding and as of December 1997 about $100 million has been spent on project components compared to an estimated project cost of $270 million (before interest). Quality of Service and Efficiency 54. Measure of service and efficiency. Four parameters were used to measure the quality of service and efficiency provided by PLDT: (i) average faults per 100 stations in service; (ii) percent fault services restored within 48 hours; (iii) debt to total equity net of revaluation surplus; and (iv) rate of return on revalued assets (see Table 6). The number of faults and restoration times were not measured by PLDT after December 1993 so it is not possible to compare results with the targets set at the time the project was prepared. As at the end of 1997 the debt to total equity ratio was 61.9% compared with the target at the time of project preparation of 51 %. This indicates a weaker financial position than that projected. 55. A further measure of improved efficiency is the number of staff per 1000 working lines. At the time the project was prepared PLDT employed 27.8 people per 1000 working lines. At the end of 1997 this declined to 9.5 people compared with a target set at the time of project preparation of 21. The indicators available show a profitable firm that is becoming more efficient but they reveal little about quality of service. H. Future Operation 56. Those project components which were implemented during the project have been integrated into PLDT's overall network and will be serviced by them. No specific plan has been developed or agreements entered into with the Bank for the future operation of the implemented project components. The equipment and services provided by the project will be maintained by PLDT under its operations and maintenance plan. The company has established corporate systems practice guidelines to ensure nationwide compliance. The company also invests in programs to provide regular training to its operations and maintenance personnel. 57. PLDT has a major incentive to maintain the infrastructure provided by the project because its revenue generating capacity. In addition, because of PLDT's relative financial strength it is highly unlikely that the firm will allow such significant assets to fall into disrepair. 58. Key operational performance targets for 1992 to 1997 are reproduced in Table 6 along with achievements for each indicator (for the whole company). PLDT has seen fit not to release new operational performance targets for forthcoming years because of the competitive sensitivity of these targets. In addition, because of the relative size of the PLDT's overall business compared to the implemented project components, it is unlikely that any company wide indicators could be developed which would reflect the efficiency of operation of the Bank funded infrastructure. I. Key Lessons Learned 59. On the basis of this evaluation the project provides the following the key lessons: a. As shown elsewhere, lack of ownership of a project by Government and beneficiaries can lead to delays and difficulties in its preparation and implementation, preventing full achievement of its objectives. When market  11 conditions changed, enabling PLDT to borrow from IFC or other sources, the Bank should have reevaluated with the Government and PLDT whether an IBRD loan was still appropriate. b. The Bank essentially had decided to finance this project as a means of encouraging a quasi-monopoly to invest. Such an approach cannot work unless that quasi- monopoly is fully committed to the objectives of the project and the specific investments. c. Convoluted on-lending arrangements should not be attempted unless (i) the government and the borrower are highly committed to the project; (ii) there are no simpler alternatives; and (iii) the Bank is prepared to accept the risk of substantial delay or even failure occurring after Board approval. d. Borrower's willingness to implement technical assistance that the Bank deems to be necessary is a prima facie indicator of ownership. A lack of such willingness should be deemed a cause to drop a project, even after it has been approved by the Board. e. Project preparation documentation and reporting systems should contain sufficient material for effective project monitoring and supervision. f. Bank lending to private companies should presume that (i) the company has no other alternative; (ii) the company is fully committed to the project's objectives and investments; and (iii) the investment program being financed provides very substantial economic and social benefits.  12 Part II Statistical Tables Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan Disbursement: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions Appendices A: Mission's Aide Memoire B: Beneficiary's contribution to the ICR C: Borrower's contribution to the ICR D: Map (IBRD No. 22934)  13 Table 1: Summary of Assessments' A. Achievement of Obiectives Substantial Partial Neeli2ible Not applicable Macro policies2 0l El D E Sector policies3 l 11 0 E Financial objectives E E O [r] Institutional development5 Cl 0 LxJ 0 Physical objectives E ECi El El Poverty reduction7 a a El l3 Gender issues E El E [3 Other social issues a Cl El m1 Environmental objectives E E E [E Public sector management E E El [-] Private sector development8 E 0 El E Other (specify) E E E lx3 B. Project Sustainability Likelv Unlikely Uncertain Project sustainability ECl El C. Bank nerformance Hi2hlv Satisfactory Deficient Satisfactory Identification9 E E L23 Preparation assistance El E l Appraisal E E Ix Supervision'0 El 0 El D. Beneficiary performance Highly Satisfactory Deficient Satisfactory Preparation El [E] E Implementation E IX] E Covenant compliance" E El [l Operation (if applicable) El El 1 The beneficiary prepared a Summary of Assessments similar to Table 1. However, its assessment differed from the Bank's in terms of: (A) achievement of objectives; (C) Bank performance; (D) Beneficiary performance and; (E) assessment of outcome. 2 Rated by the beneficiary as partial 3 Rated by the beneficiary as substantial on the basis that the project supported Government policy 4Rated by the beneficiary as substantial because of the impact the project will have on the financial objectives of the country 5 Rated by the beneficiary as partial 6 Rated by the beneficiary as substantial 7 Rated by the beneficiary as negligible 8 Rated by the beneficiary as substantial on the basis that improved access to telephone facilities promote the development of the private sector 9 Rated by the beneficiary as satisfactory on the basis that the Bank specified the scope of the project '